3 Reasons Why Facebook Wooed Snapchat

Business Insider

November 22, 2013

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Snapchat rejected a $3 billion all-cash buyout offer from Facebook founder Mark Zuckerberg. This is a bold move from both Facebook and Snapchat.

Snapchat is a two-year old app that lets people send photos to friends that vanish 10 seconds or less after they're opened. It has no revenue, but makes up for its lack of revenue with eye-popping growth and engagement numbers. It's hot now, but nothing lasts forever. Walking away from $3 billion is a gusty decision. Some people don't get Snapchat. They think it's a fleeting, gimmicky app destined to vanish on its own. Zuckerberg isn't one of them.

There are three clear reasons Facebook wants to buy Snapchat.

Sharing photos is the core use for Facebook. Snapchat is fast becoming one of the biggest photo sharing applications on smartphones. That's not good for Facebook, so it wants to buy the company.

Snapchat is developing a unique "social graph". Facebook's whole thing is about understanding the social graph, or how we interact with our friends. It's missing out on a new, key set of social data as Snapchat grows.

"Facebook-nevers" are going to Snapchat. Last quarter Facebook warned that teenagers are getting bored with Facebook. Part of the problem: Teens look at Facebook how adults look at LinkedIn. It's not super cool, and it's not a place to let it all hang out. Where are these people going? To Snapchat.

If that's not clear enough, venture capitalist Bill Gurley explained why Snapchat is a big deal in a recent tweet. He linked to a tweet from the FCC that said, "30% of college admissions officers look at applicants online... They loved your GPA, then they saw your tweets..." The implication is that Snapchat provides a safe haven for people. Today, the wrong tweet, or a bad photo on Facebook can not only embarrass you, but cause you to lose a job. Snapchat with its self destructing messages avoids that problem.

Zuckerberg tried building a version of Snapchat, and it was a flop, which shouldn't have surprised him considering Zuckerberg once said, "We just believe that an independent entrepreneur will always beat a division of a big company."

But what about the revenue problem? Just about any company that hits the scale Snapchat is hitting can generate revenue eventually. One of the company's investors told us that any big web company eventually figures it out.

People snarked that Twitter and Facebook would never make money, and now they have a combined market cap of $142 billion on combined revenues of $8.2 billion. Of that, Facebook is a $120 billion, with $7.6 billion in annual revenue. Spending $3 billion to defend the company makes sense.